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More Wisdom from “Nobel” Laureates in Economics….

Joseph Stiglitz argues in his recent book, The Price of Inequality, that structural changes in inequality played a significant role in the ongoing economic turmoil.

He cites a “vicious cycle” whereby more inequality leads to lower aggregate demand that then leads to even more inequality.

Stiglitz depicts dynamic that is the result of the wealthiest 1% having a much higher savings rate than the middle class that tends to spend most of what it earns. Falling aggregate demand hits the middle class even harder, leading to a further drop in demand that harms the middle class more than the top 1%.

Yet this is incoherent, even if one accepts the macroeconomic fable about aggregate demand being the basis of economic growth. If as he supposes that there is worsening income inequality, it is not clear that it will dampen aggregate demand. It might merely mean that those earning less than the 1% must consume all of their earnings or perhaps dissave.

He might be making the case that aggregate demand might lag if the unemployment rate rises. However, in his belief system, a relatively small injection of government spending with its magical multiplier effects could swamp any slack in demand. Of course, the US government has followed this by extending unemployment insurance payments while also engaging in “stimulus” spending.

Stiglitz believes that much of the growth in the share of income going to the wealthiest 1% is due to inefficient and predatory activity that takes larger slices of the economic pie rather than creating more for everyone, i.e., “rent seeking.” He suggests that eliminating this type of economic activity would be of great benefit, while also improving the “crisis” in inequality.

However, he does not seem to understand the Public Choice theory behind “rent seeking” that points to the necessity of restraining the capacity of governments granting or propping up privileges!

(It may well be that “Professor” Irwin Corey, the World’s Greatest Authority, has a better understanding of economic processes than Joe Stiglitz!)

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Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.